AT&T Gets Tentative Approval to Fund Pension With Preferred Stock

AT&T has received tentative approval from the U.S. Department of Labor to contribute up to $9.5 billion of preferred equity to its pension plan, in a move that would bring the telecom giant’s plan close to fully funded status.

In a “notice of proposed exemption” posted by the Labor Department on Friday, the agency said AT&T could be allowed to exceed federal limits that prohibit a company from putting more than 10% of its own stock into its pension plan. The proposal is open for public comment and, if formally approved, would be effective retroactively as of Sept. 1.

Bloomberg News

AT&T got tentative approval to fund its pension using preferred stock in its Mobility division that is valued at around $9.5 billion.

“They would certainly be the largest company that’s done something like this,” said John Culver, an analyst at Fitch Ratings in Chicago. “It’s a novel way to address some of these pension issues, and if other companies have an asset like this they could review it.”

AT&T’s pension was underfunded by about $13.9 billion at the end of last year. It filed for the exemption last October and said it hoped to get a green light by the end of this year. Under the plan, the company will transfer a newly created class of preferred equity in AT&T Mobility to the trust used to pay pension benefits.

“This is an important step toward allowing us to move forward with our contribution,” an AT&T spokeswoman said, noting the company’s pension plan covers 600,000 current and former employees.

Using preferred equity from its wireless business allows AT&T to keep its cash for other purposes and lower its tax bill, while giving the pension plan future annual distributions of $560 million.

At the end of last year, AT&T had $58.9 billion in pension obligations, while the fair value of plan assets stood at $45.1 billion.

Under its proposal, AT&T will contribute 320 million preferred shares valued at $8 billion, but with dividends the company says they are worth a total of up to $9.5 billion.

When AT&T proposed the contribution, UBS AG estimated that the contribution would lower AT&T’s cash taxes by about $3 billion in the year it is approved.

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